Why I Recommend Pendrell Corporation

Summary

Based on EV/EBIT and a mix of value factors Pendrell Corporation is extremely cheap, compared to other US-listed stocks. The stock is also close to a 5-year low.

The company has bought back loads of shares below book value.

The company invests in patents. Catalysts could be new enforcement actions and use of cash and NOLs in potential acquisition of another company.

Every month I rank global low EV/EBIT stocks on multiple criteria predicting returns. This allows me to compare these cheap stocks systematically. A cheap stock in the list is Pendrell Corporation (OTCPK:PCOA). On a statistical basis such stocks have extremely good returns. This one is also very high on my quantitative list of EV/EBIT stocks. I have not been able to buy it myself because so far there were better choices for me in other (international) stocks.

On Seeking Alpha Marketplace I share research of many other net-nets, low EV/EBIT stocks, cheap momentum stocks, cheap nanocaps and falling knives. In total I provide research on global stocks from 6 quantitative investment strategies.

See also this free overview article for a more detailed description of 4 of these 6 investment strategies. You can get more information by taking a free trial of my marketplace newsletter here.

In the rest of this article I share basic findings and data. I have updated them from my marketplace research published last April. In the table below the share price is in US dollars and numbers like the market cap are in millions of dollars.

Pendrell Corporation is essentially a patent troll. It buys patents and tries to license them to other companies and, of course, to enforce them. The company owns memory and storage patents, bought from Nokia in March 2013, digital media patents, and digital cinema patents. Most of the digital media and digital cinema patents were bought in October 2011. In a previous life the company operated satellites.

Usually returns for such companies are terrible, in particular for IT-related patents like those of Pendrell. However unlike Pendrell Corporation such companies are usually overvalued by many metrics.

The stock price is not far from its 5-year low. The company delisted in December 2017 after a 100 for 1 reverse split. The delisting saves more than 1 million dollar per year. The reverse split was meant to reduce the number of shareholders. Less than 300 shareholders is one of the conditions for not having to report with the SEC. Because of the reverse split Pendrell does not need to report with the SEC anymore. Another effect of such a reverse split is that the company bought back some shares.

In the rest of this note all share prices and numbers of shares are post-split. For a start, see the annual report over 2017.

Though my screener does not display a dividend the company paid out 12.32 USD per share on December 27, 2017. So the yield is about 2%. On October 3, 2017 the company repurchased 2000 shares for 673 USD per share. On March 13, 2017 the company repurchased 24,329 shares for 655 USD. In total the company spent 17.28 million USD on these 2 buybacks. In total more than 30,000 shares were bought back during 2017, see page 10 in the risk factors in the annual report over 2017.

Michael Lee from hedge fund Hypotenuse owns shares and briefly discusses the stock. His strategy is to invest in outstanding companies run by exceptional leaders. He sees the CEO as a savy capital allocator. Another hedge fund manager tried to buy shares at a ridiculously low price of 100 USD per share. He tried to buy out block holders suggesting a future of low trading liquidity and delisting. See also here. He was offered about 4 shares.

There are no retained earnings, just accumulated losses. However 8-years of (accumulated earnings - payouts)/Market cap is about 1, which is high.

The balance sheet is very strong with a big cash pile, hardly any liabilities and no debts. My estimate of the liquidation value is almost equal to the net current assets, since almost all current assets are cash.

The company says it is reluctant to spend the cash on new patents because of high asset and patent prices. Instead the company has divested some of the patents.

Eagle River Satellite Holdings has one non-executive director in the board, Mr. Craig O. McCaw. He owns 0.65% just for himself. But I think he also owns 100% of the shares of Eagle River Satellite Holdings, see page 77 of the annual report. His total voting power is 67.4%.

There is a dual class shareholder structure with more voting rights for Eagle Satellite Holdings. Such a dual class shareholder structure is a negative. However just like the paybacks and the dividend do the 2 smaller stakes suggest the controlling shareholder can be trusted.

My take on Pendrell Corporation

Pendrell is shareholder friendly. You can buy it at a discount to liquidation value today and get the option value embedded in the patents for free. For example, there might also be value in a new enforcement lawsuit against Kingston Technology Corporation. In addition the cash might be used in a value increasing acquisition. In such an acquisition NOLs could be monetized. See this remark of Geoff Gannon.

Become a statistical investor. Investing is mostly a game of luck. Therefore it is dangerous to invest based on conviction with large positions. But investing with many small positions in undervalued stocks with statistically great returns works just as well. So that is what I do.